by John Rubino
Real estate tends to ride an emotional rollercoaster, as anyone who made it through the 2000s can attest. But in some ways the current market is even stranger than those of past cycles. Consider:
(CNBC) – This spring home-buying season should be a coming-out party for Millennials, many of whom are finally ready to make a purchase after hunkering down for years in their parents’ basements or expensive apartments.
The only problem: Much of the food at the party is gone, and what’s left is priced like caviar.
Although solid job and income growth is emboldening many prospective home buyers, record low housing supplies are driving up prices and curbing sales, especially for Millennials looking to buy starter homes.
“For home buyers, this is shaping up to be one of the most difficult years in recent memory,” says Ralph McLaughlin, chief economist of Veritas Urbis Economics, which studies the housing market.
For sellers, it will be a standout spring that brings big profits, unless those sellers themselves are looking to buy a larger home in the same metro area. “It’s going to have the feel of a hot market,” marked by multiple offers and bidding wars, says Lawrence Yun, chief economist of the National Association of Realtors (NAR).
Already, house hunters are waiving inspections, making offers without even seeing homes and bidding well above asking price. Yet Yun predicts sales will be flat compared to spring 2017 because of the skimpy supplies and reduced affordability for many buyers.
“This year’s (spring) buyers may be competing against some of those buyers who have been unsuccessful during the past few months,” Zillow Senior Economist Aaron Terrazas says. “Increasingly, the traditional seasonal boundaries around home shopping season … are becoming less pronounced” as the fierce competition forces buyers to lengthen their searches.
Some of the hottest markets in recent years — such as Seattle, Las Vegas and San Jose — have continued to post double-digit annual price increases. Now, they’ve been joined by cities such as Nashville, Salt Lake City and Kansas City.
It wasn’t supposed to be like this. Starting a few years ago, retiring Baby Boomers were supposed to downsize en masse, flooding the market with houses bought in the 1970s, 80s and 90s and producing a buyer’s paradise full of 70-year-old sellers on their way to Florida and eager to entertain any reasonable (or less than reasonable) offer. Based purely on demographics, today’s media should be full of stories about cocky Millennial buyers who feel no need to pull the trigger.
And even without a tsunami of downsizing retirees, you’d think soaring prices would convince more homeowners to take their profits to avoid being roundtripped as many were in Great Recession.
But no. Boomers are retiring, home prices are soaring, buyers are getting desperate…and hardly anyone is willing to sell.
If you’ve been reading industry news releases the inventory shortage is a huge concern.
“Total housing inventory at the end of February rose 4.6 percent to 1.59 million existing homes available for sale, but is still 8.1 percent lower than a year ago (1.73 million) and has fallen year-over-year for 33 consecutive months. Unsold inventory is at a 3.4-month supply at the current sales pace (3.8 months a year ago).”
There are number of reasons for the inventory shortage.
First, home prices have been going up consistently in most markets for the past six years. This may sound encouraging but it also means that today’s seller will be tomorrow’s buyer, someone competing for homes which may require a bigger mortgage and steeper monthly payments.
Second, there are transaction costs associated with, first, the sale of a property and, second, the purchase of a replacement residence.
Third, millions of owners have fixed-rate mortgage financing in place at 4% or less. If they move the rate they pay goes up.
Fourth, for people in the upper brackets and for individuals who live in high-cost, high-tax areas it may be difficult to justify the sale of a current residence given tax reform.
Fifth, new construction is insufficient to meet demand. Multifamily constructionstarts were down 10 percent in 2017.
Sixth, many people no longer have the income certainty they once had. The typical work week is no longer 40 hours. Artificial intelligence, machine learning, robotics, outsourcing, downsizing, and rightsizing are threatening the hours and employment of both blue-collar and white-collar workers alike. We see more and more examples of flexible work schedules as opposed to set working hours known in advance. The result is that increasing numbers of workers earn different amounts each month. I suspect many sellers wonder if they can still qualify for the mortgage they got a few years ago.
Okay, that makes sense. Higher mortgage rates raise the cost of moving, even if it’s to a smaller place. And work isn’t what it used to be, which means mortgages aren’t the sure thing they once were.
This shrinks the transaction pipeline but raises the average amount of leverage — which adds yet another point of fragility for the next downturn.